Netflix’s quarterly earnings rise 36 pct as DVD rental service gains 1.1 million subscribers

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Netflix adds 1.1M customers, 4Q profit up 36 pct

SAN FRANCISCO — Netflix Inc.’s fourth-quarter performance sparkled as its DVD-by-mail service surpassed 12 million subscribers, and management promised an even shinier sequel to kick off this year. Investors applauded, lifting the company’s shares by more than 16 percent Wednesday.

The results reflect the growing popularity of Netflix plans that bundle DVD rentals with unlimited video streaming over the Internet for as little as $9 per month. Netflix’s success contrasts sharply with more traditional home video options such as Blockbuster Inc. and Movie Gallery, which are closing hundreds of their stores and struggling to attract traffic to the locations still open.

Netflix added more than 1.1 million customers during the quarter — the most in any three-month period in its history. It took Netflix four years to attract its first 1 million subscribers after launching its rental service in 1999.

Management is expecting an even bigger first quarter. The company projects an additional 1.2 million to 1.5 million customers by the end of March. What’s more, Netflix forecast financial results for the first quarter and the full year that exceeded analysts’ current estimates.

Netflix shares soared $8.47 in extended trading after finishing Wednesday’s regular session at $50.07, up $1.02.

The company earned $30.9 million, or 56 cents per share, in its latest quarter, a 36 percent increase from $22.7 million, or 38 cents per share, a year earlier. The performance topped the average estimate of 45 cents per share among analysts surveyed by Thomson Reuters.

Fourth-quarter revenue climbed 24 percent to $444.5 million, falling about $1 million below analyst forecasts.

That minor shortfall in revenue was overshadowed by Netflix’s pledge to boost its operating profit margin for this year to 11 percent from 10 percent last year. The adjustment will translate into additional earnings of about $13 million, or 22 cents per share, this year, estimated Wedbush Morgan Securities analyst Michael Pachter.

Netflix made the change because it feels more confident after its subscriber count rose 31 percent, or nearly 3 million customers, in 2009, said Barry McCarthy, the company’s chief financial officer. Management expects to add another 3.2 million to 4 million subscribers this year.

The company, based in Los Gatos, got a big boost in the fourth quarter from Sony Corp.’s PlayStation 3 video game console, which became an outlet for showing the company’s roughly 17,000 streaming titles. The company already had a similar deal with Microsoft Corp.’s Xbox 360 and in the spring will begin to link up with Nintendo’s Wii console.

The streaming technology is being embraced by more Netflix subscribers as they wait for their DVDs to be delivered through the mail. About 48 percent of the customers streamed at least 15 minutes of Internet video in the fourth quarter, up from 28 percent in the prior year.

About two-thirds of Netflix’s subscribers will be streaming by mid-2011, according to Reed Hastings, the company’s chief executive. He made the prediction in a Wednesday conference call with analysts.

Netflix wants video streaming to become more prevalent because the company’s postal expenses will fall as it mails out fewer DVDs to subscribers. Netflix estimates it will spend about $600 million on postage this year, with the annual cost rising to $800 million within the next few years.

By holding down its mailing expenses, Netflix hopes to be able to spend more money expanding its streaming library.